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The Coal Bailout Everybody Is Talking About

, Senior Energy Analyst | May 28, 2020, 7:00 am EDT
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Electricity prices today are low and that should be good news for consumers. And let’s face it: many Americans could use good news right now, as unemployment is up, wages are down, and for many of us, household electricity consumption is on the rise.

Unfortunately, just because wholesale power prices are at record lows for utilities doesn’t mean you’ll be seeing any of those low costs flowing through to your electric bill.

Why?

As we found in our new UCS report, Used but How Useful, How Electric Utilities Exploit Loopholes, Forcing Customers to Bail Out Uneconomic Coal-Fired Power Plants, utilities across 15 states right in the heart of the U.S. exploited power market loopholes, costing customers $350 million in 2018.

Over the past year, my colleagues and I have been analyzing how some monopoly utilities have found a way to exploit loopholes in the market rules and state regulation. We did this by using the same software that the grid operators use to help inform decision making around which power plants should (and shouldn’t) operate over the course of the year. By closely replicating what happened in 2018 and comparing it with what should have happened, we were able to determine that large swaths of the coal fleet operated when lower cost (and cleaner) resources were available.

By exploiting loopholes, companies that have a monopoly on providing power to its service base can run expensive power plants all day long without consequences, even while lower cost resources are plentifully available on the open market. The UCS report out today found that five utilities—Cleco Power, DTE, Xcel Energy, Duke Energy, and Ameren—were particularly egregious in ignoring market signals, operating very expensive coal-fired power plants and shunting the use of other, lower-cost generation sources.

 

Sunshine as a disinfectant

 

In my inaugural UCS blog titled, “The Coal Bailout Nobody Is Talking About,” I helped shine a light on this hidden coal bailout that was happening in states across the county. Since then, that work has been called the “story of the year” by Greentech Media’s podcast “The Energy Gang,” been a sought-after topic of discussion at conferences across the country, and been a hotly contested issue in utility proceedings in over a dozen states.

We also have the Midcontinent Independent System Operator (MISO), the grid operator responsible for delivering electricity to much of the Midwest, acknowledging that curbing the practice could produce hundreds of millions in savings.

Thanks to the tireless work of organizers, communications staff, analysts, and consumer advocates, this issue is now the coal bailout everyone is talking about!

But that doesn’t mean the fight is over, there is still plenty of resistance to change in the utility industry.

 

What are the utilities saying?

 

Utilities tend to get a bit defensive when you point out that they are wasting ratepayer dollars. But at a time when many families are experiencing economic turmoil, every dollar saved on bills matters dearly.

To their credit, a few utility companies have acknowledged their practice of self-scheduling and have begun to change how they operate their coal-fired power plants.

One change I’ve seen since analyzing their 2018 practices is some companies are now planning to pause coal plants operation for months at a time—a move that would save customers millions. For example,  Xcel and Cleco, despite initial resistance, have proposed the path of converting units to seasonal operation, a solution UCS has advocated for.

Utilities are starting to conduct their own investigations into self-scheduling of coal plants, thanks in part to what UCS has been saying all along: consumers stand to save tens of millions of dollars a year if the utilities in MISO (and in other regions of the country) choose to operate these uneconomic coal plants less often.

Other utilities remain intractable, insisting that they are doing nothing wrong. For example, DTE Electric Co., was ranked in the new report as the second-worst utility, in terms of burdening customers with expensive coal when less expensive electricity was readily available off the open market. DTE representatives insist that its coal generation and commitment practices do not cost its customers anything. However, our new analysis refutes those claims, as do previous analyses by UCS, Sierra Club, and Bloomberg New Energy Finance, as well as an analysis conducted as part of a fuel-adjustment rate case in front of the Michigan Public Service Commission.

 

What is MISO saying?

 

Most recently, the market operators and market monitors have begun talking about this issue. By and large, the reports are well aligned. As noted by Utility Dive, MISO’s retrospective analysis was largely in agreement with UCS analysis of the issue.

MISO has started to recognize that current levels of self-commitment may be problematic and has begun to explore ways to address it from the perspective of market participation and system efficiency.

Part of that exploration includes a potential multiday market that, coal-plant owning utilities say would enable them to participate more efficiently. MISO investigated the potential for multiday markets, assuming different levels of increased market participation. MISO found that even at modest increases in switching to economic commitment would yield large benefits.

A 2019 MISO report detailed the “value proposition” that the organized market provides participants. Dispatching the most economic resources to meet the region’s electric needs, MISO provided the system with $282 million to $312 million in benefits in 2018. Those benefits were realized, despite the large portion of capacity not fully participating in the market through the practice of self-committing. Comparing the benefits that MISO currently provides with the potential $350 million in additional production-cost savings the new UCS analysis has found suggests that eliminating uneconomic self-commitment of power plants would double the benefits to MISO–and to the customers who rely on power from that grid.

 

The numbers that matter the most

 

Market efficiency is ideal, and companies should be concerned with the efficient allocation of resources. But at the end of the day, the most important metric in my book is the consumer. How does this market exploitation impact the typical Midwest family?

Our new report makes it very clear: uneconomic commitment practices are costing customers every time they pay their bill. The worst actors–Cleco in Louisiana; DTE in Michigan; and Xcel Energy in Minnesota—collectively lost hundreds of millions of dollars by choosing to sell the most coal-powered electricity when less expensive electricity was available from market sources. They also drove the vast majority of consumer costs for folks in the Midwest. And though Cleco and Xcel are at least attempting to make course corrections to how they operate their plants, DTE and many other egregious utilities have yet to rectify their actions and are still being bailed out by consumers.

TABLE 1. Residential Electric Bill Savings, by State

State  Average Monthly Consumption (kWh) Estimated Monthly Residential Savings Estimated Annual Residential Savings
LA 1,282 $15 $184
TX 1,176 $14 $168
ND 1,118 $6 $77
MI 671 $5 $61
MN 786 $5 $54
IL 719 $4 $47
IA 893 $4 $44
AR 1,156 $3 $40
MO 1,118 $2 $27
MS 1,247 $1 $16
KY 1,166 $1 $12
IN 1,006 $1 $10
WI 693 $0 -$2

SOURCE: USED BUT HOW USEFUL (UCS 2020). MISO customers would have saved roughly $350 million through the more efficient use of existing resources of its electric system in 2018. For each state, savings reflect only customers within the MISO footprint and are based on UCS modeling and historical consumption patterns of residential customers. Actual savings would depend on the utility service provider, mechanisms for cost recovery, and the profit structure of utility/customer profit sharing.

 

Conclusion

 

Automatic cost recovery without scrutiny from regulators has enabled some utilities to lose millions of dollars in wholesale markets without incurring actual losses on their balance sheets.

In most parts of the United States, the cost to buy and burn coal exceeds the market price in most hours of the year. From a financial perspective, it makes sense for power plants to burn coal for fewer and fewer hours with each passing year. And with each passing year, it makes more sense to replace that coal with low-cost renewables, like wind and solar power.

For over 100 years, rate-regulation of electric utilities has been predicated on the notion that a public regulator can act as a substitute for competition. In a truly competitive market, these levels of uneconomic coal generation would not exist. Where state regulators seek to provide discipline in the absence of market forces, a strong signal is needed to bring the utilities’ attention to minimize these ongoing expenses. Utilities will often throw up strawman excuses in technical proceedings for why their coal plants are so uneconomic, but it is not incumbent on the regulator to innovate on behalf of the utility.

Rather, utility companies, particularly those who have a monopoly presence, are obligated to come up with a solution and regulators should either approve or disapprove of the companies’ proposals.

And if they don’t? Utility customers will continue to be on the hook for hundreds of millions of dollars year after year.

 

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  • Israel Umar

    you need house music for the campaign support, we have house music, deep house and afro house music

  • Toluwanimi

    I do agree with you daniel. I hope ourFederal Government looks into this

  • BC

    Joseph, I tried to get ahold of you on Twitter but I must not be good at it as I never heard back. Have you looked into the Ohio Valley Electric Co-op and their self-scheduling at the Kyger Creek and Clifty Creek plants?

    • JDanielUCS

      Hey, sorry I never got back to you on Twitter, sometimes, by the time I sit down to respond, I can’t find the response. But this analysis was looking MISO and I believe OVEC is part of PJM, no? It wouldn’t have been covered by this analysis. OVEC is… problematic for so many reasons.